Much has been written over the past year about the new digital currency Bitcoin – especially after its price skyrocketed 15x in just a few months, followed by a blow-off correction of over 50%.

But what exactly is it? How does it work? How secure is it? What are its advantages (and disadvantages) to sovereign fiat currencies? To precious metals?

In this week's podcast, Chris talks with Gavin Andresen, chief scientist of the Bitcoin Foundation and lead developer for its digital currency project.

On Bitcoin's Founding Concept

Bitcoin really is a new kind of money. It is a new concept in how you can 'do' money, in that it is a virtual or digital currency that isn't issued by a central bank. It isn't created by some central corporation. Instead, everyone who is participating in the Bitcoin network – so everybody who is running the Bitcoin software on their computer in communicating over the network with other people who are running the Bitcoin software – all of those people together collectively perform the functions that a central bank would typically perform. Those people all create the currency. Those people all make sure that the transactions that happen are valid and that invalid transactions are rejected. So collectively, together, everybody who is running the Bitcoin software makes the system work. And that makes it very resilient, really. It is resistant to central control. It is resistant to manipulating the money supply. It is resistant to censorship. It is resistant to a lot of other bad things that have happened with our traditional fiat currencies.

On Bitcoin's Security

Bitcoin is also like cash. If you own some Bitcoins and you are holding some Bitcoins in your digital wallet then that is like holding physical cash in your physical wallet. If somebody steals that wallet, then they have got your Bitcoins.

You asked, will I lose all of my money if a server crashes? That is not an issue. All of the tens of thousands of Bitcoin miners looking for Bitcoin actually hold a record of all the transactions that have happened on the Bitcoin network. There is no one single server that can crash and take all of your Bitcoins away. It is very distributed and reliable in that way. But again, you are responsible for holding what I call your ‘private keys’ that let you spend your Bitcoins. And if you lose your private keys, either to a hacker attacker, or if your computer crashes and you didn't have a backup of your keys, then you can lose your Bitcoins.

On Bitcoin's Future

I think Bitcoin will be an answer. I still tell people, only invest time and money into Bitcoin that you can afford to lose. It is in early adopter stage. I would still consider it a high-risk investment, if you want to think of it as an investment. It could be really huge. I think there is no theoretical reason why Bitcoin couldn't grow as large as some of the major national currencies. There is really no technical reason why it couldn't and no theoretical reason why it couldn't. There is a huge network effect with money. The more people using a means of exchange, the more valuable it becomes to use that thing as a means of exchange. That is why gold is king, and not platinum or silver. There has been a huge network of people finding gold to be a great stored value, and in certain situations, a means of exchange. Bitcoin has a huge head start on any other alternative.

We are still really at the early adopter phase. We have been since Bitcoin started. Adoption is actually happening pretty quickly. Right now, all of the Bitcoins in the world are worth somewhere over a billion dollars. That gives you a sense of scale on how big the Bitcoin economy is. Last year I was doing some research and I was looking at how big is Bitcoin relative to some of the smaller, national fiat currencies. They assumed that Bitcoin was probably smaller than any other national currency. And to my surprise, I actually found out that there are some small nations where the national currency is worth less than Bitcoin

Click the play button below to listen to Chris' interview with Gavin Andresen (35m:41s):

Chris Martenson: Welcome to another Peak Prosperity podcast. I am your host, Chris Martenson, and today we are fortunate to have Gavin Andresen with us as our guest. Gavin is the chief scientist of the Bitcoin Foundation, where he serves as the lead developer for its digital currency project.

Today we are going to talk about the rationale for alternative currencies – the benefits of a digital currency system, of course. But then I want to really dig into the advantages and challenges offered by Bitcoin.

All right, Gavin. The rise of Bitcoin has generated a lot of interest amongst the Peak Prosperity audience. So we are really pleased that you have agreed to join us today and help us better understand how this new digital currency works.

Gavin Andresen: Oh, great. Happy to be here.

Chris Martenson: Fantastic. Gavin, in your opinion, why is there a need for alternative forms of currency to exist in fiat money systems? I mean you have made this your life. You are pouring a lot of your effort into it. What draws you to this?

Gavin Andresen: I was first attracted to the Bitcoin project partly because I'm a computer geek. I write software for a living, and it is very interesting software, partly because I'm interested in economics. And the economic model behind Bitcoin really appealed to me. And then, also, just because I've been interested in peer-to-peer decentralized technology, so technologies where there is no one person, company, government in control. Bitcoin combines all of those things together into a system that is really exciting.

Chris Martenson: Let's talk about this system. For a lot of people, Bitcoin is a word, but it's not yet a developed concept. Explain to us, if you could, how the Bitcoin model works and what makes it unique over any other form of digital currency that might exist.

Gavin Andresen: Sure. Bitcoin is really a new kind of money. It is a new concept in how you can do money, in that it is a virtual or digital currency that isn't issued by a central bank. It isn't created by some central corporation. Instead, everyone who is participating in the Bitcoin network – so everybody who is running the Bitcoin software on their computer in communicating over the network with other people who are running the Bitcoin software – all of those people together collectively perform the functions that a central bank would typically perform. Those people all create the currency. Those people all make sure that the transactions that happen are valid and that invalid transactions are rejected. So collectively, together, everybody who is running the Bitcoin software makes the system work. And that makes it very resilient, really. It is resistant to central control. It is resistant to manipulating the money supply. It is resistant to censorship. It is resistant to a lot of other bad things that have happened with our traditional fiat currencies.

Chris Martenson: I'm really fascinated by this. Tell me how Bitcoin comes into being. You are talking about a self-regulating environment, and I'm interested in – actually, how does it work?

Gavin Andresen: Sure. I could talk technically for hours, but I will try to keep it not so technical and geeky. Basically, there are people who are running what is called Bitcoin mining software – actually, these days, there is Bitcoin mining hardware, where these people are connected to the Bitcoin network, seeing all of the transactions that are flying by. They gather up these transactions into what are called “blocks.” So, blocks of dollar transactions. Then they run an algorithm that is designed to be very difficult to solve, but very easy to check to make sure your solution is correct. So all of these Bitcoin miners are busy running these checks to make sure all of their transactions are valid. And then they are running this special algorithm that is basically busywork, a make-work algorithm that is designed so that it takes a while for somebody on the network to do what is called “solving a block.” To find that magic number that makes a block have certain mathematical properties. Then once somebody on the network finds a block, they announce it as this is a valid set of transactions and everybody else on the network checks it.

You might ask, well, why in the heck would somebody do all of this work of validating transactions and finding these blocks of transactions? The answer is very clever. The answer is, the very first transaction in one of these blocks of transactions is a special transaction that creates Bitcoins out of thin air. All of these Bitcoin miners are trying to find blocks because they will own that first transaction. They will own the Bitcoins that come out of that very first transaction that just creates Bitcoins.

Right now on the Bitcoin network, we are creating 25 new Bitcoins every 10 minutes. When I say “we,” I mean the Bitcoin miners, who are doing this work who are all competing against each other to try to be the first person on the network that solves a block and announces it to the world and is therefore rewarded with 25 brand-new Bitcoins. That is the only way that coins are created.

Chris Martenson: So they are created in this way. What limits the creation of them, if anything?

Gavin Andresen: The creation is strictly limited by rules written in the software. So if a Bitcoin miner decided to modify their software and say I want more than 25 Bitcoins; I am going to generate myself 100 Bitcoins every time I find a block. Or I'm going to find a block quicker than everybody else. Everybody on the network checks all of the transactions, and they would see that that transaction didn't follow the rules written into their software, and they would reject the block. So again, since everybody is running software that implements the same rules, you get these rules essentially set in stone. You would have to convince everybody to upgrade their software to have different rules to change that aspect of the system.

Chris Martenson: But as long as the mining is happening and the blocks are being solved, Bitcoins are being created, right?

Gavin Andresen: Exactly, yes. Transactions get verified. That is really the number one reason for miners to do their work. You make sure that the transactions are verified. Somebody has to do the work of making sure that Bitcoins aren't spent twice. That all of the transactions are valid and they were created in valid blocks and so on and so forth.

Chris Martenson: All right. So talk about these transactions that happen that get collected in these blocks. What are these transactions?

Gavin Andresen: The transactions are basically one person paying another or one entity paying another. So if I send you some Bitcoins – let's say I sent you half a Bitcoin. I would generate a Bitcoin transaction that reassigns Bitcoins I own from me to you. That transaction is broadcast over the network, and then it is gathered up into a block by a miner, and that is when it becomes what we call ‘confirmed.’ Because until a Bitcoin is put into a block and confirmed, there is no guarantee. I might have sent you half a Bitcoin, but I could have at the same time tried to be sneaky and send somebody else that half a Bitcoin. Miners doing this important work of confirming that yes, the transaction is valid and this is going to be the history. And everybody is going to agree that I sent that half a Bitcoin to you and not to somebody else.

Chris Martenson: Okay. Got that. Mining is one way to obtain Bitcoins. What is the other way?

Gavin Andresen: Well, like any other money, you can trade them for products or services. Or, for example, my salary is paid in Bitcoin. Every month, instead of getting money deposited into my U.S. Dollar bank account, I get Bitcoins sent to one of my Bitcoin addresses, and that is how my salary is paid.

Chris Martenson: Interesting. How successful has Bitcoin adoption been so far? Where is it actively being traded in the world right now?

Gavin Andresen: We are still really at the early adopter phase. We have been since Bitcoin started. Adoption is actually happening pretty quickly. Right now, all of the Bitcoins in the world are worth somewhere over a billion dollars. That gives you a sense of scale on how big the Bitcoin economy is. Last year I was doing some research and I was looking at how big is Bitcoin relative to some of the smaller, national fiat currencies. They assumed that Bitcoin was probably smaller than any other national currency. And to my surprise, I actually found out that there are some small nations where the national currency is worth less than Bitcoin. So all of the Bitcoins in the world are worth more than – it is up to now something like a couple of dozen national currencies in smaller currencies around the world. Bitcoin is actually larger, has more value, and is a larger economy than those small nations. Adoption has exploded and is really taking off, which is fantastic.

Chris Martenson: And with this adoption, have you noticed any patterns in different cultures, regions of the world, countries that have really fallen for it compared to others?

Gavin Andresen: It has been interesting. There is a big – well, small – Bitcoin community in a town in Germany, which is interesting. I think we will probably see Bitcoin taking off in places where people remember their national currency being incredibly unstable. I think a lot of people in Germany still remember the hyper-inflation that happened after WWI. And so a system like Bitcoin that cannot be hyper-inflated away really appeals to them. We will see that in other places around the world where the national currency hasn't been particularly stable. I think here in the United States, there is a lot of interest and we are a really big country; there are a lot of Bitcoin users here in the United States. I don't think Bitcoin will go mainstream first here just because the dollar has been a relatively stable fiat currency compared to other national currencies.

Chris Martenson: Yeah. Well, I've certainly heard – gosh, where was it; Kenya? I was hearing somewhere in Africa, they just flashed across the news that Bitcoin is apparently very popular there as well.

Gavin Andresen: Interesting. Yeah, there are so many things happening in the Bitcoin world that even I have trouble keeping track of all of the great things that are happening all over the world.

Chris Martenson: Let's talk about what the challenges might be to this widespread adoption. We have heard maybe Germany is open to the idea, potentially, because of prior history with money systems. What are the blockages that you see that might exist for adoption in countries right now?

Gavin Andresen: There are some technical issues, just in terms of how easy it is to use Bitcoin software. How easy it is to keep your Bitcoins safe. I still tell people that Bitcoin is like a high-tech Internet stock. It is a risky investment, and unless you are technically savvy, it is somewhat risky to hold Bitcoins. A lot of people have had Bitcoins stolen because their computers were insecure. Things like that. I'm really optimistic that will get fixed fairly shortly; in the next year or two, I think it will be much easier to hold Bitcoins securely. It will be much easier to trade them, and it will really be much easier for mainstream, non-geek people to use the system. That is happening.

There is one big caveat to that. That is the other big challenge that I see, and that is how governments will react to Bitcoin and will governments decide to try to either regulate Bitcoin or prevent people from using Bitcoin. That is a big open question. Here in the United States, it looks like the regulators are open to Bitcoin. I'm the Chief Scientist of the Bitcoin Foundation, and one of the missions of the foundation is to help protect Bitcoin. Part of that is interacting with regulators and trying to educate them on what is Bitcoin, how could it be regulated, how should it be regulated, those kind of issues. I'm cautiously optimistic about all of that, although there are a lot of onerous laws and regulations around handling money. And so I think it remains to be seen kind of how things evolve, certainly here in the United States and around the world. There won't be one answer, because each country has its own laws and regulations regarding what citizens can do with money.

Chris Martenson: Sure. It is actually one of the more potent areas is to find regulation and lots of oversight. Certainly, I have been reading about what appears to be early salvos at containing Bitcoin or otherwise getting regulatory arms around it within the U.S., other places, other countries looking, too. Define it as something that really needs to be looked at. It seems to me from this vantage point that Bitcoin has gotten the attention of various authorities in various countries and that they are – I don't know that they are necessarily unified against it or for it yet, but they are certainly starting to wrestle with what it means. What is your sense of where you are in that part of the story now?

Gavin Andresen: Again, I still think we are at the early adopter phase. Even in terms of regulation and regulators and how will regulators deal with it, which pigeonhole will they put it in. And then, of course, it is interesting because you have regulators who are tasked with the unenviable task of trying to figure out how new things fit into existing laws. These laws were written before the Internet, before there was even a concept of peer-to-peer technologies, let alone peer-to-peer money. It is a big challenge for regulators. I empathize with the difficulty of their task, because Bitcoin is something brand-new and really, there aren't any laws that exactly match it.

Part of it will be regulators trying to figure out how does it fit into the existing framework, and then, of course, lawmakers will probably at some point get involved and start to write some new laws or modify existing laws to take into account this new technology. You see exactly the same thing on the Internet with arguments about copyright. Are there any rights involved in linking to content and deep linking? Whenever there is a new technology, the legal system has to catch up.

We will see. It is still playing out. It is still early. Again, I don't think there will be one answer. I think there will be different answers in different countries around the world. I think some countries will probably be much more open to letting people transact with each other freely using whatever currency they want to. And others will be much more strict and want to control how their citizens spend their money.

Chris Martenson: How about the taxing authorities so far? I assume they would be one of the more if not most interested parties in any of these discussions you are talking about.

Gavin Andresen: It has been interesting. The IRS has not made any rulings on Bitcoin yet. Although, I believe it was the Financial Crimes Enforcement Network, which is another arm of the U.S. Government, I think they had a memo saying that the IRS should come out with some guidance on how to treat Bitcoins. I think everybody I've heard from thinks that it is pretty clear and that Bitcoin transactions will be treated just like barter transactions. If you sell something for a Bitcoin, then you owe sales tax just as if you had traded something for a barter credit. There is existing regulations and laws around barter transactions that apply if you are trading anything for anything else of value. I think that will actually be pretty straight-forward, at least here in the United States. Other countries might be different, again.

Chris Martenson: All right. Let's go back to something that you touched on briefly. I want to ask the question: How secure is Bitcoin? And to frame that, what is your answer to this question: Could I lose all my money at the click of a button or if a server crashed?

Gavin Andresen: I'll give you a two-part answer. The core Bitcoin system is incredibly secure. There is a company called Bitpay that provides merchant services to officers of companies that are selling products for Bitcoin. Bitpay has never had a fraudulent transaction. Unlike paying for things online with credit cards, where there are all sorts of credit card fraud and other things like that happening, the core Bitcoin system is incredibly secure. You don't have to worry about somebody spending your Bitcoins out from under you because they somehow hacked the Bitcoin system. Bitcoin has been looked at by security experts, and everybody is convinced that the underlying system is technically secure.

Now, that said, Bitcoin is also like cash. If you own some Bitcoins and you are holding some Bitcoins in your digital wallet then that is like holding physical cash in your physical wallet. If somebody steals that wallet, then they have got your Bitcoins. There have been a lot of Bitcoin thefts because a lot of people either lost their wallet and their wallet was not protected by a password, or they lost their wallet and they were using a weak password to protect their wallet. Or maybe some virus or malware got into their computer and installed what is called a keylogger and managed to get both their wallet and their password because there was bad software running on the computer watching them type their password as they typed it. That is why I say Bitcoin security is not a solved problem yet. We really need to make it much easier for people to have a really secure Bitcoin wallet so it is much harder to lose your Bitcoins to hackers.

You said, will I lose all of my money if a server crashes? That is not an issue. All of the tens of thousands of Bitcoin miners looking for Bitcoin actually hold a record of all the transactions that have happened on the Bitcoin network. There is no one single server that can crash and take all of your Bitcoins away. It is very distributed and reliable in that way. But again, you are responsible for holding what I call your ‘private keys’ that let you spend your Bitcoins. And if you lose your private keys, either to a hacker attacker, or if your computer crashes and you didn't have a backup of your keys, then you can lose your Bitcoins.

Chris Martenson: And what would be some of the potential answers to getting people a more secure wallet but that is also not onerously difficult to operate?

Gavin Andresen: We can look at the traditional banking system for some potential solutions. And the Corporate coin network has lots of tricks up its sleeve. There are some features built into a core protocol that we haven't evolved the software to expose to users yet. The technical work that I have been working really hard on involves transactions where more than one key is needed to spend those Bitcoins. You have Bitcoins protected by two keys. And then one key is kept on your computer and one key is kept somewhere else. Whenever you spend Bitcoins, the transaction will have to be authorized on your computer and then at that other place, also, which could be your mobile phone, it might be some service that provides some verification and checking. I could imagine a service where they automatically authorize transactions under a certain amount per day. If you have $100,000 worth of Bitcoins, maybe you set up a wallet where you are only able to spend up to $1,000 per day, and anything larger than that requires some kind of manual call to verify who you are to make the transaction go through. All of that kind of thing can be built and will be built. It is going to take some time.

I should also mention there are also people working on hardware Bitcoin wallets. These are physical pieces of hardware that can store your Bitcoins and perform Bitcoin transactions. I think for a lot of people that might be a much more secure way of holding Bitcoins and performing Bitcoin transactions. If you have a dedicated piece of hardware that does nothing but Bitcoin, it can be made much more secure than a general piece of hardware like a computer or cell phone, where if you are running other software there is the potential for attackers to get in it and put malware on your system that tries to steal your Bitcoins.

Chris Martenson: Well, if we ever lost our Bitcoins, the NSA would be able to tell us where they were, wouldn't they?

Gavin Andresen: The funny thing is, every Bitcoin transaction that sends you Bitcoins is public record. All of the miners are watching them. We know where they are. Everybody knows where they are. It is just that you can't get them out unless you have that private key that only you know. Even the NSA - you can arrange things to be very sure that even the NSA doesn't know that private key. You can even generate Bitcoin private key pairs completely offline from any computer. So there are paranoid people who they create what is called a ‘paper wallet,’ where they take a computer, a brand new computer that has never been used for anything else. They generate some Bitcoin addresses, Bitcoin key pairs. They print out the private keys on pieces of paper and put them someplace safe. They store the computer so there is no possibility those private keys will ever be anywhere other than those pieces of paper. And then you can send Bitcoins to the public keys associated with those private keys and have basically Bitcoins stores on paper which you can then put in your safe deposit vault or some other place safe. That is an example of someone being ultra-paranoid, but maybe in this era of NSA surveillance, maybe it is not too paranoid to make sure that nobody knows your private keys and no one but you can spend your Bitcoins.

Chris Martenson: It is not just the NSA. It might be we are concerned about Cyprus or any other parts of the system. It sounds like a way to take your wealth and have it – it is floating around in the virtual world, right? But you have a physical manifestation of it that is out of the system. It is kind of a hybrid. It is in the system, but the access to it is completely out of the system. It is an interesting hybrid.

Gavin Andresen: There is another interesting variation that is kind of mind blowing. That is the notion of a ‘brain wallet,’ where if you can think up some long passphrase that you can remember but nobody else would be able to guess, essentially you can send Bitcoins to that passphrase. It doesn't even need to be written down anywhere. It can just be in your brain. Then you are essentially carrying around those Bitcoins in your brain. Only you know the key to unlock them. All the old-fashioned notions of, for example, governments trying to control the flow of currency across their borders – with Bitcoin, where all of the Bitcoins basically live in this cloud all over the world and where the keys to unlock the Bitcoins can be on pieces of paper or can even be just entirely in your brain, it opens a lot of really interesting possibilities and certainly gives you a lot more freedom in control over your wealth.

Chris Martenson: That is fascinating. I have a question from a reader at the Peak Prosperity site. He wrote in March that the Bitcoin network experienced a minor catastrophe when the block chain broke off into two divergent versions due to unanticipated glitch and a new version of the mining software that someone was running. I found it confidence-inspiring to see a community quickly come together and back out of the update. But it begs the question: Have any actions been taken to provide more thorough QA on subsequent updates such that we can expect less chance of future confidence shaking events like this? I see that it has two parts. First off, can you explain what he is talking about when he says a block chain broke off into divergent versions, and then around the QA question?

Gavin Andresen: Sure. That was a stressful night.

Chris Martenson: I'm sure.

Gavin Andresen: So we have all of these miners all over the world validating transactions and validating these blocks of transactions that happen. On that day in March, it just so happens that we had rolled out a new version of the software. The old version of the software had a bug in it that we weren't aware of but the new version fixed. And the problem was, we had about half of the miners running the old version and half of the miners were running the new version. And they disagreed about whether a block was valid. So half of them rejected that block in a transaction, and another half accepted it and continued going. Now, it turns out that the miners had upgraded their software more quickly than most of the merchants and people accepting Bitcoins, so most of the merchants and people who accept Bitcoins were accepting the old version of history, the old transaction chain. We realized this, and some of the big miners decided to basically give up their blocks and switch to the other version of transaction history. And so that resolved the issue and – 26 blocks, a block every 10 minutes, after five or six hours everything was good again and everybody agreed about what the valid transactions were. That conflict got resolved.

The question asks about what can we do to make sure that doesn't happen again in the future. And actually, the other core developers and I wrote up a document. There is more in the document on what happened and what we can do to make sure it doesn't happen again, because it theoretically could happen again. If it does happen, how can we react quickly? How can we make sure it doesn't have large consequences for everybody? We do have a plan for mitigating that risk.

One of the things that will really help make sure that kind of things doesn't happen in the future is to get more diversity of software running on the Bitcoin network. We have this original software that was written that basically everybody has been using, but people have been re-implementing Bitcoin in different program languages with different – for whatever reason; maybe they don't like the style of the code that was written – there are new implementations of Bitcoin that follow exactly the same rules but are just written differently. One of the nice things about that is, once those come online, we won't get in a situation where half of the network has a bug and the other half doesn't have a bug. It will be maybe 10% of the network has a bug that rejects some block, while 90% of the network will agree. As long as you don't get close to the 50/50 situation, that won't happen. I think as Bitcoin evolves and grows and we get more diversity in terms of Bitcoin software running on the network, that situation becomes less likely to happen, which is a very good thing.

Chris Martenson: All right, final question. Is Bitcoin the answer, or do you see it as part of a larger portfolio of competing alternative currencies? You know, you’ve got gold and silver, airline miles, whatever those other things are that we attach value to. Where do you see Bitcoin fitting into this universe?

Gavin Andresen: I think Bitcoin will be an answer. I still tell people, only invest time and money into Bitcoin that you can afford to lose. It is in early adopter stage. I would still consider it a high-risk investment, if you want to think of it as an investment. It could be really huge. I think there is no theoretical reason why Bitcoin couldn't grow as large as some of the major national currencies. There is really no technical reason why it couldn't and no theoretical reason why it couldn't. There is a huge network effect with money. The more people using a means of exchange, the more valuable it becomes to use that thing as a means of exchange. That is why gold is king, and not platinum or silver. There has been a huge network of people finding gold to be a great stored value, and in certain situations, a means of exchange. Bitcoin has a huge head start on any other alternative.

For some other alternative or another crypto-currency to overtake Bitcoin at this point, I think it would have to be a whole lot better in some way. It’s hard fro me to imagine, how do you make it so much better that people want to use that other thing rather than Bitcoin? I can imagine a few things that might make it a whole lot better, like if some major government decided to issue a Bitcoin-like currency, that would certainly give that currency a lot of legitimacy. That could compete with Bitcoin. Although it is hard for me to imagine a government being forward-thinking enough to do that. We will see. It is going to be fun to watch. Bitcoin has certainly grown a whole lot faster than I expected it would. I'm cautiously optimistic that it will keep on growing.

Chris Martenson: So let's pretend I'm brand new. I want to buy a Bitcoin instead of mine one. How would I go about doing that?

Gavin Andresen: Right now the easiest way to mine Bitcoins is to probably to sign up for a Coin Base account. There is a company called CoinBase.com here in the United States. They let you basically attach your Bitcoin wallet to your bank account, and then you can very easily buy and sell Bitcoins directly via transfers to and from your bank account. So that is probably the easiest way. If you want to be more anonymous, if you don't have a bank account or you don't trust the banking system or you don't trust CoinBase, there is actually a useful website called localbitcoins.com, where you can find people buying or selling Bitcoins in a geographic area near you and you can physically meet somebody and hand over some cash and they will send the coins to your digital wallet. If you go to the Bitcoin.org homepage, it has been recently redesigned to try to be more new-person friendly. There is lots of information there about getting a Bitcoin wallet and getting Bitcoins in all sorts of different countries all over the world. Again, it really depends on where you are in the world, as to what the easiest way is to get the coins.

Chris Martenson: So last last question. You get paid in Bitcoins; how do you spend them?

Gavin Andresen: I will be perfectly honest. I can't pay my mortgage in Bitcoin yet. So some of them I convert into dollars and spend them that way. Then I'm always looking for products and services I can buy for Bitcoin. There is a big electronic store that will accept Bitcoins for when I need a new hard drive or when I need a new monitor or whatever. My most recent purchase, I bought some t-shirts for Bitcoin. There is a website where you can buy plane tickets for Bitcoin. I actually haven't used them yet. They are pretty new. There are more and more products and services available for Bitcoin all the time. I'm a computer geek, so a lot of the services I need, like web hosting or DNS services or other geek things, just about all of those types of things I can buy for Bitcoins, and it is slowly starting to move into more mainstream products for non-geeks.

Chris Martenson: TVs and T-shirts sounds pretty mainstream from here. That is wonderful. We have been talking with Gavin Andresen. Gavin, thank you so much for your time today.

I would remind people that if you want to find out more, go to Bitcoin.org as one of the sites mentioned. That sounds like a good place to get started if you want to find out more and learn how to get started with your own Bitcoin wallet.

Gavin, thanks a lot for your time today.

Gavin Andresen: No problem. Great talking to you, Chris.

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About the guest

Gavin began his career working on 3D graphics software at Silicon Graphics Computer Systems. Since leaving the Silicon Valley, his positions included CTO of an early voice-over-the-Internet startup and co-founder of a company making multiplayer online games for blind people and their sighted friends. Most recently, Gavin has been the lead developer for the Bitcoin digital currency project.

DId he say it? He did. "Bitcoins are created out of thin air." While I posit that Central Planning is an almost certain disaster waiting to collapse, the concept of viable alternatives are an absolute necessity, but this guy just revealed the big problem that makes BitCoin just as flawed as the FED; they 'print' them just as the guys at 33 Liberty & the Eccles Building are printing dollars.

If I am mistaken, please shine the light on me, I am very open-minded.

Bitcoin itself is, among other things, an electronic payment system, with some built-in rewards, or sentiments, for the peer-to-peer network to confirm the transactions.

This means that every 10 minuttes new bitcoins are "unlocked" as a reward to the peer (miner) that first confirms the transactions from the last 10 minuttes. In the beginning, in 2009, the reward was 50 bitcoins every 10 minuttes, that changed to 25 bitcoins last year. The reward will halving approx. every 4 years, thus the maximum amount of bitcoins ever will be approx 21,000,000. Right now approx 11,500,000 exist. However, each bitcoin is divisible by 100,000,000, so it's perfectly possible to buy, let's say, 0.005 bitcoin, which by the current exchange rate is about $0.5

In the future, as the reward deminishes, the peers (miners) will be rewarded by small fees from transactions.

Many people like to think of Bitcoin as Gold 2.0 as they have several similarities.

Here are some short videos and some educational classes, if you are further interested.

the whole idea is to get people to believe a concept is a real entity and having more of anything makes one wealthy. what a crock

this is taking our current problems further into lala land. put your money here....the wizard of oz

to quote:

I think a lot of people in Germany still remember the hyper-inflation that happened after WWI. And so a system like Bitcoin that cannot be hyper-inflated away really appeals to them

do the math: most people remember things/events by the age of say 5. that means all of these "lots" of german people who remember were born between 1915 and 1925, so they would be 88-98 yrs old right now and that is if they survive ww2, and if still lucid, control how much money?

c'mon people.....resilence calls for some common sense. bitcoin is another scam trying to float an idea that sets up a further scam.

Bitcoin is money if a critical mass of folks agree that it is and start using it for trade. This has happened. Bitcoin does not take our, "currrent problems farther into Lala land".. it is simply a form of money that will have a tendency toward deflation if/as adoption increases due to its algorithmically enforced scarcity ... which is very different than the inflationary tendency of infinitely "printable" fiat currencies like the dollar. You don't have to like Bitcoin, and you certainly don't have to use it, but your denigration of the concept suggests to me that you have no idea the corrosive nature of our current money system... the one that you show your bias toward when you say, "put your money here....the wizard of oz"... you are saying that you don't want to go wasting your precious US paper dollars on this silly Bitcoin, right? We are all programmed from an early age to be paperbugs... and it is up to each of us to break through this and understand what money is, and what is money.

The Welfare State, funded with fiat money, has produced millions upon millions of humans who have grown accustomed to a good life based on credit and welfare.

........

Fiat money has destroyed humanity’s normal way of life; a way of life in which men and women could find their places and were thankful to have them. That old way of life is gone; the old attitudes toward life and work have been erased.

This is destruction many times worse than the worst destruction of any war. That is where we are today. This is what fiat money has brought to the world. Fiat money is the child of the arrogance of human intellect, which has sought to invalidate the laws of human nature which have regarded the precious metals as money for thousands of years, and sought to substitute an intellectual construct for the real thing. Now we are going to pay for that arrogance.

Bitcoin is not a scam. It is free market money. You can't just say something is a scam ... you need explain why it is, otherwise your argument has no merit. Who benefits from this "scam"? Bitcoin is decentralized, there is no beneficiary in your imagined scam.

If we combine Bitcoin's transaction trail with the NSA's ability to monitor electronic traffic worldwide, we would likely end up with a high degree of certainty as to what was spent, and where, and by whom. As the currency becomes more popular, the incentive to track where it is spent increases - if not for tax purposes, then for the purpose of blackmailing and/or otherwise tracking the buyers.

Credit cards and paypal, of course, are much worse.

But if high-profile people go into this imagining that their bitcoin purchases are untraceable, and they engage in what might be for them risky transactions, then the transaction log seems like it could be an unpleasant surprise. Gold, and paper currency do not have this behavior. You can't look at a buck and see where it has been spent. Most people don't care about this feature, which is why they're ok to use credit cards that track everything you do.

If your transaction volume falls below the radar of what governments care about, it likely won't matter. Unless you're up before Congress someday for your confirmation to the Supreme Court. Then all sorts of surprising things come out. But that's not most of us.

If you treat bitcoin like a credit card and you assume the government (if sufficiently motivated) will be able to put the puzzle pieces together eventually and figure out it was you making the transaction, then - no worries.

If the currency were actually difficult to trace, the US intelligence community would likely be having kittens right now. Their current approach of benign neglect is a strong indication (to me anyway) that this is a "honey pot trap" for those who imagine their activities are not traceable. Imagine the same level of enthusiasm that is being applied to the Snowden situation focused on bitcoin.

Last point. If the government is out to get you for something (say, your future activities in an Occupy Movement) then Income Tax Evasion is a pretty good substitute. That's how they nailed Al Capone.

Once you are ok with being traced, then all you need to deal with is the currency's volatility. As with anything that's not an established meme, it can fluctuate wildly. However as with anything else that has perceived value, the longer it is remains in place providing its service, the less volatile it should become.

I think that in essence everyone looks after numero-uno. Even the good folks at the Nefarious Spooks Association. If they, individually, see merit in this bit coin for their for their own private affairs there might be a lot of doing what we are designed for- rationalization and deceit.

There will be a lot of winking and nodding at a blind horse.

Edit: Personally I like to know the name and address of the person I am dealing with.

I have followed Karl for some time, and have some insight into his positions.

Karl D does not suffer fools lightly, well not at all actually. When Bryan tweeted Karl that he had mis-spelt Bitcoin in his article title as BitCon Karl would have instantly peged him as a fool, as his 'miss-spelling' was a deliberate slur BitCon as in a con job.....

And if Karl read Bryna's post he would have held up his "I told ya so" sign.

Bryan quoted Karl

""I want to first demolish the argument for using it that is going around in various circles and media these days — the idea that it is stateless (that is, without a State Sponsor) and this is somehow good, in that it allows the user to evade the tentacles of the State.

This is utterly false and, if you’re foolish enough to believe it and are big enough to be worth making an example of you will eventually wind up in prison — with certainty."

Bryan then said "This man is clearly against a stateless currency, which is a position I can understand. Saying that bitcoin is not stateless is just plain wrong by every measure."

Karl , in the above quote, does not state that bitcoin is stateless, but ridicules the idea that being stateless is good. ( he also later says "Third, because Bitcoin is not state-linked...." )

He makes it very clear that it will not enable the user to avoid the tenticles of the state despite any claims that it will. A clear warning to people who think that it will enable them to evade state tentacles. He would probably say ' feel free to try and use it that way, but dont act surprised when you find yourself behind bars.... '

Bryan's failure to correctly interpret the bit of Karl's post would have again had Karl holding up his "told ya so" sign

For the rest of it, It is clear to me that Karl understands financial laws far better than Bryan, and has a deeper undrstanding of the technical aspects around bitcoin than bryan.

Bitcoin isn't an easy thing to understand. They are created by solving very complex mathematical problems, using a lot of computer power and electricity. So although they are created, there is a lot of computer power needed and they are limited to 21 million bitcoins. In many ways they mirror gold in rarity, difficulty to mine, and limited availability. Therefore they can't be just printed to infinity. There difficulty to mine goes up as there numbers increase.

The main advantage of Bitcoin over gold is it's portability. It can be sent peer to peer anywhere in the world.It is completely de-centralised and because the transactions are held collectively it is almost impossible to control. There are some good explanations of bitcoin on You Tube.

i'm saying money is a concept. it doesn't matter whether it be a feather , or shell, or paper that is traded, it in it's own self is worthless. people ascribe worth to whatever they want. i'm saying we need to remember that...that the shell or paper bill or digital ons and offs have value only by our believing minds.. and therefore subject to fraility that is unpredictable and vulnerable to someone else declaring it is worthless or worth more for that matter.. i'm also saying that the bitcoin is a lead in to having a complete digital economy controlled by even fewer humans with no accountability or having to back it up with any hard assets. i see the bitcoin as becoming further out of our control. when money was back by something tangible like gold, there were limits in place. once rulers had to make coins smaller or water them down with other medals to inflate. then the gold standard was removed,and a paper bill said it was a reserve note.(where are the reserves and reserves of what). now putting money on computers and digital cards and digital cell phones continues the ability of the powers that be to create more "money" out of nowhere with no accountability. it's easier to lie because who can really check it.? bitcoin takes it one step further into constructed lala land.or put another, now the money isn't back by anything, turn the electricity off and all records disappear. or add afew zeros and retire somewhere nice.

i said nothing about the us dollar at all. and you ascribed my thoughts to be there when they weren't just like the afore mentioned ascribing of value. it's construct. not real. i believe the us dollar too is worthless and one day the veil will lift on it . it is worthless because the belief of value given it by people is based on faith of the us gov't to make good.the us gov't is broke. who will pay up the bitcoin if it's only concept that backs it up?

i see the bitcoin as some concept conjure up out of thin air . yes our gov't's hadling of the us dollar is riddled with theft, fraud you name it. but i see the bitcoin as being easier to riddle with theft fraud etc.because it's on a computer , hidden from sight. it's a concept like all the mortgages sliced up and resold into such a complicated mess that it becomes impossible to forclose or track the path. it takes the concept of money and makes it virtual...not even a shell to represent the value of my labor.

i do not what to trade my hard labor for any amount of a digital notion. i want something substancial back for my labor.

the bitcoin may be a new form of money but new does not translate in to better, safer trades. isee it as repackaging of the same old concepts only more vulnerable and cheaper to make out of thin air. i haven't seen any consistent agreement as to how much money(in total in the world) is actually out there, but it's easy to see there are far more zeros on paper than actual hard assets to back it. there is a mismatch.

digital money makes it almost impossible to run the bank and with no run to call into account, this after all means the myth can continue, that there is more money out there , it will never collapse, and it will always have be valued by the people.it's just not true. it's not backed, it's constructed and has to be believed in to obtain value.

people are free to believe what they want to.

the earth has too many people in it that it doesn't have enough resources to sustain them. the money has to inflate to keep up with the population increase and the only way to do that is to deflate the value of one manpower hour, or make the money virtual(constructed out of thin air) or both.

i see nothing stable or good about that.but that is why things are occurring right now as they are. things have to go virtual(pretend) to keep up with an exponentiated system of growth.

in short the bitcoin is no savior to a fraudulent system. if it makes one feel better to believe myth before going off the cliff then by all means believe away. i believe the cliff is there in sight. and the sheer momentum of the herd may just take me over too.

It's very easy to create an online wallet, and later on, perhaps a desktop- or mobile wallet, if it's of interest. Alternatively you can set up a donation option through websites like www.bitpay.com, that will immediately convert your bitcoins into a fiat currency of your choice.

You make some excellent and concise statements of the principles that drew many of us here in the first place, and I could not agree with you more;

the earth has too many people in it that it doesn't have enough resources to sustain them. the money has to inflate to keep up with the population increase and the only way to do that is to deflate the value of one manpower hour, or make the money virtual(constructed out of thin air) or both.

I am also with you in belief and action that I want Gold and Silver for now to represent my stored labor... not fiat, and for the most part, not Bitcoin either. I do though think that Bitcoin is the best alternative that has ever existed... while very clearly a conjured, thin air (digital) construct... maybe I am just more comfortable with things in the digital realm having and deserving to have real value since I work in the computer industry. Anyway, I just get testy when I sense that people are conflating Bitcoin with fiat currencies, and I see now that you were not doing that.

You said,

but i see the bitcoin as being easier to riddle with theft fraud etc.because it's on a computer , hidden from sight. it's a concept like all the mortgages sliced up and resold into such a complicated mess that it becomes impossible to forclose or track the path. it takes the concept of money and makes it virtual...not even a shell to represent the value of my labor.

I honestly don't think Bitcoin could be subject to the kind of fraud you are imagining because it is open source software, which means that the software is maintained and curated by programmers all over the world. I have likened Bitcoin to being the Linux of money... and any lack of blockchain (the digital DNA which contains the history) integrity is quickly picked up within the system.

I am not saying that Bitcoin is perfect.. If and when we get (real) quantum computers on the scene, the jig is up, along with anything else using this generation of cryptography. As well, I always pay attention to our friend LogansRun, and I don't doubt that TBTP could in fact put hurt on the Bitcoin system via their friends in Congress and/or Treasury, or maybe inject some kind of digital mayhem... who knows. But for now and the mid-term future, Bitcoin looks to me like a viable alternative for Stateless trade.

Regarding the block chain divergence that occurred. The answer was enlightening for me in that I did not realize that there was developing, or ever would be a diversity of mining software versions in use. My picture was that there was one dominant version and always would be... and I see how the diversity of versions would have the beneficial effect of limiting damage from future occurances of accidental bugs, while at the same time this seems to be a potential area of vulnerability as well for clever programmers who may want to harm the system, using a new version of mining software as their vector. Are there enough community eyes on each of these new versions to insure that no rogue code exists in them?

Um, OK, here's a thought. If we assume that industrial civilization is collapsing, why would I want to put more energy into something that is going to fail along with everything else dependent on cheap energy? I would rather put it in PMs, preps and in developing skills. Bitcoins, though an interesting concept, are based on the assumption that our technological society will continue. I guess I'm not confident that the internet will survive the Great Unravelling. Maybe it all depends on the timeline one has in mind. It does seem like a smart techno -geek way of getting around our current fiat currency. But is it any better as a substitute as things continue to deteriorate?

Perhaps some will choose to pursue bitcoins with the thought that they will pull out when it looks like the tide is turning. But how will you know just when that is? It reminds me of those who think they can predict the timing of the market. I just don't trust something with that kind of risk. Someone less cautious might be fine with it though.

And I think Jim makes a good point that TPTB will step in should it conflict with their plans and profits.

Personally, I guess I'd rather have metals, food etc. in hand than ephemeral bits that could disappear when TSHF; I feel the same way about US dollars. It will be interesting to see how this plays out.

I don't see bitcoin as a con or a scam at all. I think it's quite legitimate. As long as you understand the risks, its all good. Which brings me to...the risks.

In most business plans, there's an entire section devoted to "risks". That's the least fun section for the founders to write. Who wants to get all depressed thinking about the downside?

Here's my top level cut of that for bitcoin.

Relies on a functioning Internet. jdye51 feels that the internet might not survive the great unwind. Bitcoin requires a functioning internet - distributed processing is a virtue, but without a functioning internet, its also an achilles heel. Without transaction verification, you cannot validate bitcoin transfers. If the internet crashes for any serious length of time, bitcoins will be worth zip. "Oh yeah I remember back when the Internet worked, bitcoin was all the rage..."

Relies on a worldwide, mostly-connected internet. The bitcoin system may not survive a major power war - and I'm not talking thermonuclear here, just a conventional one. Like globalization, we've had a mostly-free (mostly unsegmented) internet since its inception. Its taken as a given that everyone can talk with everyone else. The Great Firewall of China is the exception, rather than the rule. If hostilities break out - real hostilities between major powers - do we imagine that interconnectivity between countries will survive? No way connectivity remains, it would be too dangerous. Imagine a Japan/China conflict, with the US coming in on the side of Japan. China bitcoin holders couldn't have their purchases verified by American bitcoin servers. Vice versa true also. And a segmented but still-functioning network is the best case outcome of that sort of scenario.

Relies on networked and functioning personal computing hardware and software. During a major power (conventional) war that ends up "getting serious", the Internet as well as personal computing may well be the first casualty. I'm...as certain as I can be that the major powers have a big enough stockpile of zero-day attacks on the popular OS versions as well as many routers that may end up effectively wiping out our computing environment as we know it today. The equipment will still all be there, but the software (and likely files too) on some significant but effectively random percentage of equipment will simply be inoperative. Systemic failure will be the result. Of course, a lot of other stuff will go wrong because of that too, so perhaps your lost bitcoins are not your primary concern. A well-funded terrorist group might be able to mount such an attack also. I recall reading that our friendly CIA currently pays some not-insignificant amount of money for verified zero day attacks. Certainly in the aftereffects of such an attack, networking will likely be substantially less popular.

Relies on the continued forbearance of governmental authority allowing conversion of bitcoins to local money as well as real goods & services. A large power deciding to make such a conversion illegal would hammer the price of bitcoins. Fatally? It depends on how big the power, and how enthusiastically they intervened. Snowden was unable to leave Russia; if the US government felt the same way about bitcoin for whatever reason, bitcoin value would likely crash. A massive loss in value might well destroy a still-delicate faith in bitcoins. After the tulip bubble crashed, people still grew tulips, but nobody was interested in them as a trading vehicle or a store of value. Motivation for government action might include capital control enforcement, or an increasing use of bitcoin as safe haven during a hyperinflationary situation.

Faith is a delicate thing for any currency. The longer it has been around, the harder it is to shake. Gold: thousands of years. US Dollar: 200 years. Bitcoin: a lot less. Our Chief Bitcoin Scientist is right to call bitcoin a risky investment. It relies on things going pretty much they way they've always gone - continued and relatively complete interconnectivity, network-connected hardware & software, no great power struggles, continued government forbearance, etc.

Full points to the Chief Scientist by the way. He strikes me as a guy with his feet solidly on the ground, doing something potentially very interesting. As long as we know what can go wrong, we can see where bitcoins might fit in to our personal strategy.

When a block is discovered, the discoverer may award themselves a certain number of bitcoins, which is agreed-upon by everyone in the network. Currently this bounty is 25 bitcoins; this value will halve every 210,000 blocks. See Controlled Currency Supply.

Additionally, the miner is awarded the fees paid by users sending transactions. The fee is an incentive for the miner to include the transaction in their block. In the future, as the number of new bitcoins miners are allowed to create in each block dwindles, the fees will make up a much more important percentage of mining income.

i'm a retired graphics artist that started with photoshop vs 2.5 on floppies and live in the same town as ps' creator thomas knoll and have chatted about digital this and that with him at various seminars and once began to pursue C++. having said that, i'm an old maid now and have always been a write a check so i have a receipt and conduct business in person type. i was taught business by my grandparents who lived during a not so trusting era.(make sure yu inspct the merchandise before you buy) and i have a garage full of receipts.

i understand that i was born(1953) at a peak in this society and now have the luxury to become old as the society declines rapidly. i guess the fur on my forearms bristles when i hear of any construct touted as safe. it's my early warning device going off(DEW the defense early warning system of the us over nuclear attack by soviet union)).

under more safe conditions, i would mostly agree with you re bitcoin.

clearly these are interesting times

i find human nature to be as much a constant as any variable in financial, politics, surviving etc. so i weigh bitcoin along with presidential addresses, etc against the constant of human nature, ie fraud, greed, selfishness, the opportunity to exploit.... yadayada how does the new hold up against what time has teste as true about human nature.

the farmer i bought my land from sold to me in 2006, at $6700/acre to me and $10K / acre to my neighbor. 3 years ago the farmer on his right died and the children wanted 5K /acre..he passed on it because he want to pay $4K/acre. now the farmer on his left has died and the children want $10K /acre. and he moans unfair etc. you tell me. did he not set the value when he sold to me and my neighbor?

these are the things that will play out. the things to take into consideration. how will they play out with basic human nature.

i would like to hear more what others think will play out when the constructed concepts poop out due to various obvious logic.

The internet as a whole was from the beginning designed to withstand the acts of war. That said, governments, could actively shut down parts of the it on command due to unfortunate centralization of nodes. But most parts of society relies on the internet these days and the demand only accellerates, so taking down all of it would be quite difficult as the sentiment for keeping it up is very big. The network itself can quite well run on very little solar power or other means of sustainable energy. It can also be a lot more decentralized than today. In fact there are a few projects in the works to ensure a functioning internet even in the case of war or governments trying to shut it down. One is called https://projectmeshnet.org/ - a peer 2 peer routing network and very resilient to shutdown attempts.

If you are afraid of zero day attacks, I would advice you to run a true and tried open source OS that has been properly peer reviewed. They do exist. There's a good reason why agencies like the NSA prefer to run Linux. So start in that area - there's plenty of distributions to choose from.

Bitcoin is not dependent on American servers or Chinese servers for verification. The distributed ledger (the blockchain) gets verified by whatever miners are in the network at a given time, event 1 miner is enough. It can also survive being fragmented, and when reconnected to other fragments, the forked blockchain will be merged again.

Bitcoin can also be exchanged as a physical commodity. https://www.casascius.com and paper wallets are examples of that. It's perfectly possible to handwrite paper wallets with small amounts, say $10, and exchange those instead. You see, the access to an amount on a paper wallet in essense requires nothing more than the letters and numbers of a private key (e.g. 5KJvsngHeMpm884wtkJNzQGaCErckhHJBGFsvd3VyK5qMZXj3hS) - that part can be communicated with internet, phone, radio, morse, letter, handovers and any other imaginable way of exchanging information.

Bitcoin does not rely on the will of any government - it's an encrypted peer to peer distributed ledger. Sure, governments could deem it illegal and try to enforce its failing, inflated fiat currency on people. Just as the Roosevelt administration did with Executive Order 6102 on gold. As history shows, after the order was revoked, the price on gold soared. Contrary to gold, bitcoins can not be confiscated as long as the owner of the bitcoins does not or is not able to reveal the private key unlocking the amount. It is also important to remember that Bitcoin as a distributed system, in essense, exists everywhere. It knows no laws, no physical boundaries, no governments. It's based on cryptography and hard math.

In the event of a collapse, it would seem foolish not to hedge even just a small of your wealth in bitcoins.

The risks I see to bitcoin are quite honestly not technical, they are marketplace and exchange-rate focused.

Much like credit cards, to be accepted at the point of receipt, the receiver of a bitcoin must have a computer, and it must be connected to one of the miners for verification. Of course you can accept a bitcoin without verification. Is anyone here willing to do that from someone you don't know and trust?

What's more, for the verification to be certain, that miner that does the verification must be part of a larger network. If it is off on its own segment, then it cannot verify that this bitcoin has not already been spent on a different segment.

These things aren't technical issues even though they seem technical. They are faith issues. They go straight to the issue of "can I have faith that this bitcoin I'm accepting is real and unique?" Assuming a situation where network connectivity is gone, once people realize that they can no longer validate the bitcoin, their own personal willingness to accept them and give others scarce real items in exchange will suffer, possibly fatally. A person cannot examine a bitcoin themselves and determine if its real. Once the validation system suffers an interruption of service, just like credit cards, bitcoins will most likely be (more or less) worthless until that system comes back online again.

And apart from the validity risk, the acceptor also is taking exchange rate risk as well. If disconnected from the network, how can one determine the current exchange rate? Everyone who trades knows that when risk increases, bid/ask spreads blow out. Without network connectivity, what might the bid/ask spread be of an unvalidatable bitcoin?

Thought experiment: most people's credit cards are valid, yet how many places accept credit cards during blackouts? Then imagine the blackout lasts longer than a week? A month? How many would accept cards then? At that point, the "card" transaction slip simply becomes an IOU, and its more about individual trust than about the card itself providing any sort of guarantee. What's more, with an IOU denominated in local currency, there is no exchange rate risk.

Presumably, during times of emergency one would like one's store of value to work with people other than your close friends. There are scenarios under which bitcoin does not do so; under those scenarios, other things such as FRNs and/or physical PM will likely do substantially better.

As long as we understand the circumstances that will affect people's faith in being able to accept bitcoins and determine if they are real (and have not already been spent somewhere else), we can figure out where bitcoins might fit in our planning. Certainly, if the network were in place and I wanted to move money, bitcoin seems pretty cool. How could a repressive government detect me transporting my bitcoins if the key is only a pass-phrase stored in my brain?

So I believe that in some situations, they are great. Others, they will not do so well. If the Internet were largely offline for six months, I believe that the value of bitcoins would likely approach zero during that period and in those areas affected by the outage. Would they rebound afterwards? Now that's an interesting question. I suppose it would depend on the view people took as to the likelihood of another internet outage happening again.

FWIW I'm a big fan of open source too. My router runs openwrt. Possibly this will help my subnet to survive if an unpleasantness hits, although its unlikely I'll be able to talk with anyone else...

shortly after events in 2008,(spring09) local merchants refused to accept credit cards, reasoning that if the user didn't pay his/her bill , the business owner was out the money same as in a bad check. those shoppers without other means of puchasing, were out of luck. trust started to unravel fairly quickly for strangers in this small farming community. trust remained and held the line among locals and the local bank.exception was the local sand and gravel who accept cash only from everyone.things back to normal within 6 months.

The department is starting out by subpoenaing 22 digital-currency companies and investors to get a lay of the Bitcoin land. They sent letters to the major Bitcoin players asking them to hand over information regarding their money laundering controls, consumer protection practices, source of funding, pitch books (for Bitcoin start-ups) and investment strategies (for Bitcoin investors). The recipients of the subpoenas are nationwide and include everyone on the “people making real money on Bitcoin” list, such as Bitcoin exchanges and processors, “ mining equipment” maker Butterfly Labs, and major investors, such as the Winklevosses, Marc Andreessen & Ben Horowitz, and Google’s venture fund.

Bitcoin wallets and transactions do not require encrypted connections. They don't really need to. Your coins all have a "serial number" that is tied to a wallet number. Think of each wallet as a numbered bank account that is not tied to any one person. You can create them any time you want and send money back and forth or use them just one time only and never again. This keeps your identity (fairly) hidden.

But because every Bitcoin server (miner) gets to record EVERY transaction - everybody in the world keeps the ledger and can track the entire history of the serial number assigned to the bitcoin from its genesis. So there is a history to watch the transactions - each time it's traded and divided (Down to 8 decimal places). You can download the "TOR" browser and get on the encrypted world wide web and be off the grid completely if you choose to conduct your affairs that way as well. (Google TOR Browser for more info).

As bitcoins are a virtual currency - they exist as data...ones and zeros as is all data you are now looking at over the internet. Does that make them less real? Are my words you are reading now real?

The big difference is the Fed plays by its own rules. It can make more money when and if it wants. As do all central banks. THere is nobody to stop them.

Bitcoin is regulated by math. It's the ultimate power in the universe and cannot be changed. There rules indicate that a predicable, obvervable set of currency will be issued every 10 minutes. This is a "law" that cannot be changed*. Because of this predictablity, it will eventually likely gain a VERY stable price point once it is mass-adapted. Currently there are only about 11 million coins in existance. The amount created drops to half every four years (Bitcoin started into existance just over four years ago with blocks of 50 every 10 minutes. It was just halfed recently and will half again in about four more years...until about 21 million coins are eventually created into existance - still more than 100 years down the road.

The first purchase using bitcoins was 20,000 to buy two pizzas. Now converted to about $100 each, those pizzas "real cost" in today's dollars? - 2 million dollars.

Think of bitcoins as "God's money" (As it is controled by natural law of math) and controlled by the people, not central government. It's revolutionary. The Internet - of money. You're open-minded??? How about "Future Minded"? What happens to the value as bankrupt companies (See Argentina) put captial controls on foreign money and gold purchases. What happens to the value when demand for those paultry 11 million coins is demanded by 20 million broke Argentina, Greece, etc..etc.

* Possible to change in an emergency *IF* you can convince at least 51% of all intenet bitcoin miners to change out their software to use the new code base. Getting 51% of tens of thousands of people all over the world to agree to a change would be difficult but possible if there was a really, really, really good reason (Huge bug found?)

First they ignore you, then they laugh at you, then they fight you, then you win.

A lot of people in this disccusion speak only in terms of shtf. Yes, bitcoin probably isn't going to be the saviour of mankind during a moment like that. Some people think precious metals will be? I own a lot of silver, but how long is that going to be accepted? Not enough people have it in my opnionion. Without an internet, who can tell how much value a ounce of silver is worth?

So I think there is a place at the table for virtual currencies. I don't think they can be dismissed out of hand. The concept is WAY different than what we've considered money in the past. The whole concept of money is when it comes down to it -a mass illusion. For the most part it is digital ones and zeros in a computer. The silly paper money is just a symble of the mass illusion of a common medium of exchange.

But think of this: Almost nobody knows what bitcoin is still. It's VERY early in its life. Most of the world has no access to banking systems in third world. With bitcoin, all they need is access to a smartphone. This is much easier. You don't have to open an account or be "credit worthy". You can buy things all over the world for bitcoin and its still in its infancy. With such a limited supply - and demand to EXPLODE as the world wakes up to this existance, imagine the possiblity of what a few coins now might be worth in another 10 years? Thining as a futurist - people might one day LAUGH that it took a full bitcoin to pay for a house. Transactions might be held in .0000001 bitcoin for dinner. (Probably called nano-bc units by then). For even the possiblity of that future, what's the harm in plopping down $100 to buy just one bitcoin? As an experiment, buy $100 in silver and put a paper wallet of you bitcoin in a jar, then 3.5 oz of silver in the jar next to it. Which one will be more likely to buy a house in 10 years?

High Risk investment.... probably a good way to think of it for now. But for my money, I don't mind playing a fun poker game with they guys, or drop a few bucks at a blackjack table - it's "fun money" that I kind of expect to loose, but honestly if I have gambling money to spare - I belive my odds and potention to be very rich are MUCH better in putting it down on this bitcoin idea before the herd rushes in. If just one million people in the world get that same curiosity - can you predict the price? Cash out to dollars and convert that to gold in two years. Imagine the possiblities,

what about the money that the goverment receive from our transactions. How can goverment support for example justice, medicine, science if its going to receive less money. Is goverment going to do nothing just see how transactions in bitcoins get bigger?

Does anyone can get a loan in bitcoins to build a house, or create something that has good future but needs more bitcoins that he has? And what would be the interst? Maybe paid in bitcoins that doesnt exist yet?

Dave, thanks for the calm and well-thought-out analysis. I fully agree on your risk analysis, based on the nature of the current internet, and your assessment of the Chief Scientist.

I'd like to speculate a bit, though, about the possible fate of the internet as The Long Descent occurs (I'm basing this on John Michael Greer's model of a slow, rough, stairstep decline, rather than a fast, apocalyptic crash).

First, an aside: Bitcoin seems to me to be in the well-established company of alternative currencies, which have been developed in many times and places, typically in response to major dysfunctions of official currencies. (Peter North's book "Local Money" is a good survey of recent examples; for a more comprehensive look at monetary systems, see Bernard Lietaer's "New Money for a New World", which somewhat unintuitively harks back as far as ancient Egypt.) Of course, Bitcoin takes good advantage of a widespread online "community", leveraging a confluence of technologies.

It seems to me that one could use the design of Bitcoin to create a local version, circulating within a geographically "compact" community. For example, a city could, in principle, set up a "Gotham City Bitcoin", with mechanisms to keep it local, and other mechanisms to convert between it and other systems to facilitate trade.

I'm going to guess that, as global and national electric grids and other systems become unreliable, on the way to becoming unavailable, there could arise multiple local networks (meshnet, etc); these would be able to stay reliable considerably longer (think of packet networks based on a ham radio network, using locally generated electricity from solar, wind, geothermal, etc). As long as computers of reasonable power can hook up to communications with reasonable bandwidth (and/or patient users), there could be networks, and possibly something vaguely like Bitcoin.

Again, I'm not predicting, just speculating. Anybody else got a good story?

Isn’t BC in a way backed by US Dollar because US$ (fiat currency) itself is used for purchasing BC. How is this aspect not factored in? Afterall, the Fed isn’t issuing BC’s along with paper currency? Hopefully - FED could issue BC’s with appropriate laws and regulations in place in future but till then BC is only a very tiny buffer catering to those who have the hands to operate a computer? It has to go beyond young tech-savvy hipsters.

On Point 1 alone, BC, I feel, cannot to be treated or construed as currency/money despite it being marketed as such by the BitCoin Community. Gavin himself hints at this being a barter instrument (an instrument accepted for barter but not entirely as money ... ala sophisticated Baseball cards perhaps??) … in a way succinctly clarified by him at the 17:01 mark & also by quoting “It is like cash” at the 18:41 mark. So Gavin himself was careful to not call it money - at least not directly. If you can’t pay govt. taxes, mortgages, then it cannot be mainstream - one should consider these as highly acceptable baseball cards thanks in part to the internet. An acceptable form of currency has to be govt. sanctioned & not be reliant on internet alone. There are billions without access to internet/technology - is this not to be considered?

If tech-savvy geeks control the authentication of transactions, then there is a possibility of manipulation by these geeks in the future? If LIBOR can get manipulated, what stops the pool of geeks from coming together and manipulating the BC just like the printed money today?

This is exposed to the fallibility of how internet operates - solar flares, cable outage, political viewpoints, govt. restrictions thru’ institutions like NSA, etc are all good reasons to see BC in a skeptical light. Let us not forget that NSA controls Google and is a virtual spy on all who use technology. BC could very easily & effectively be ‘curtailed’ if things get too ‘enthusiastic’ - as we all know privacy rules are only on paper as far as NSA is concerned.

OS like Android are vulnerable to malware attacks.

There has to be an organized officially & legally, perhaps federally recognized regulated structure for BC even if it has to be outside the purview of govt policies & political spanners in order for BC to be truly autonomously considered with the freedom to transact with whosoever without central banks or exchange rates. Unless this is accepted by state, it is safe to argue that BC could be regarded as a more ubiquitous form of barter out there .. mainly because of the internet. I don’t mind bartering in either baseball cards or bitcoins if it serves my purpose toanextent. Taking care of all of the above, however, BC could then become a viable alternative to fiat currency.

There is bitcoin with its particular algorithm, and there is electronic money in general. E-money that requires no particular mining operation, simply a digital signature of a central authority, is easy to construct. Stored value cards (more or less) do just that. Bitcoin's magic is that no central authority is required to construct money or validate transactions. Heck, Gotham transport cards could be used as currency if it came to that.

Now then, I don't know bitcoin's architecture well enough to know if what you propose will work out. It sounds interesting, but I'd have to know the algorithm at a deeper level than I actually do to know if bitcoin's operations could be regionalized.

It would be very interesting to have Bernard as an interviewee. His findings on the the sustainability of an 'ecosystem of currencies' are amazing. (based on the modelling of complex flow networks in ecology and physics) http://www.money-sustainability.org/

His insights on currency systems in ancient Egypt and medieval Europe and their interplay with cultural values and achievements (pyramids / cathedrals) are equally interesting.

Bitcoins are not made out of "thin air", increasingly complex and expensive computers solve hashes, which is estimated to cost half a million dollars a day. This is what gives Bitcoins intrinsic value, alongside their rarity, like gold.